- Covering salesforce.com's earnings results each quarter feels like déjà vu.
- I like the predictability of the SaaS model, as well as margins and cash flow that continue to move in the right direction.
- CRM might prove to be a good acquisition for investors looking for quality and stability, despite the price tag.
There is no stopping SaaS behemoth salesforce.com (NYSE:CRM).
This Wednesday, the San Francisco-based company delivered yet another of its trademark all-around beats - salesforce.com has not landed short of expectations on revenues or earnings as far back as I can verify. Sales growth of 25% has remained consistently in the mid-20s range since 2014, underscoring the power of the company's subscription model. EPS of $0.35 topped consensus by a penny, arriving also 25% above year-ago levels.
Credit: Company's earnings slides
Covering the company's earnings results each quarter feels like déjà vu. The financials and op metrics continue to improve slowly but surely. While sales cloud gains scale and is likely to reach a decelerating revenue growth stage (the segment was responsible for $3.6 billion of the company's total $10.5 billion in 2018 revenues), the smaller marketing and commerce cloud division picked up the slack and posted impressive growth rates of 45% for the year.
On a non-GAAP basis, fiscal 2018 marked the expansion of op margins by another 130 bps YOY, following an 80 bp and 170 bps increase in fiscal 2017 and 2016, respectively. And although GAAP opex as a percentage of revenues inched above the 70% mark again (see graph below, on the right), the minor spike seems consistent with the seasonal trend observed in fiscal 2017. All factored in, it looks like costs continue to be under control, even if SBC expenses are still a tad too rich for my (conservative and value-oriented) taste.
Source: DM Martins Research, using data from company reports
Wrapping up the financial highlights, cash flow moved up at a faster pace than revenues, as salesforce.com's (1) collections on unrealized revenues increased substantially YOY and (2) earnings continued to improve. On the balance sheet side, the company's bank account is stuffed with $4.5 billion in greenbacks compared to last year's $2.2 billion, indicating liquidity will not be a problem for this cash-rich software company.
On the stock
I have always been fearful of CRM due primarily to the stock's valuations. On a non-GAAP forward P/E ratio, shares are valued today at nearly 70x, a higher price tag than February 2017's 60x. See graph and table below.
|Company/Ticker||Forward P/E||LT EPS Growth||Forward PEG||TTM FCF Yield|
But I have to admit that salesforce.com has a solid subscription-based business model that attracts me for the predictability of the SaaS revenues. Margins are moving in the right direction, and so is cash flow. Growth rates, although not stratospheric, have yet to slow down significantly because, in my view, the company's smaller businesses (platform and marketing/commerce) have been developing well and gaining scale.
All taken into account, CRM might prove to be a good acquisition for investors looking for quality and stability, even if at a bit richer price than some might be comfortable paying on this stock.
Note from the author: I do not own CRM in my portfolio because I believe I can generate long-term growth with limited downside risk in a much more efficient way. This is why I built my Storm-Resistant Growth Portfolio. To learn more about it, click here and take advantage of the 14-day free trial.
This article was written by
Daniel Martins is a Napa, California-based analyst and founder of independent research firm DM Martins Research. The firm's work is centered around building more efficient, easily replicable portfolios that are properly risk-balanced for growth with less downside risk.
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Daniel is the founder and portfolio manager at DM Martins Capital Management LLC. He is a former equity research professional at FBR Capital Markets and Telsey Advisory in New York City and finance analyst at macro hedge fund Bridgewater Associates, where he developed most of his investment management skills earlier in his career. Daniel is also an equity research instructor for Wall Street Prep.
He holds an MBA in Financial Instruments and Markets from New York University's Stern School of Business.
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On Seeking Alpha, DM Martins Research partners with EPB Macro Research, and has collaborated with Risk Research, Inc.
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